Week 5 Assignment



Week Five Exercise Assignment Financial Ratios

1a. Liquidity Ratios

]Ratios

Formula

Edison

Stagg

Thornton

Current Ratio

Current Assets/Current Liabilities

1.46

1.46

1.46

Quick Ratio

(Current Assets-Inventories)/Current Liabilities

1.32

1.12

0.92

Edison is more liquid than other two companies since company has fewer inventories i.e. 1000 than other two due to which Quick ratio (refers to company's ability to overcome their short term obligation having most liquid assets) is greater than Stagg and Thornton. Furthermore, current ratio which shows company capacity to meet their short term debt obligation is same for all three companies (Needles, Powers, Crosson, 2012).

On the basis of Quick ratio, the most liquid firm is Edison.

2a. Computation and Evaluation of Activity Ratios

Alaska Products, Inc

Activity Ratio

Ratios

Formula

19X5

Accounts Receivable Turnover

Net Credit Sales/Average Accounts Receivable

4.62

Inventory Turnover

Cost of Goods Sold/Average Inventory

6.29

Activity ratios indicate the efficiency of the company in assets utilization. Account receivable turnover indicates company efficiency in credit sales collection, while inventory turnover measure company efficiency in inventory management. Higher these turnovers better for company productivity (Drake, Fabozzi, 2012).

3. Profitability ratios, trading on the equity

Calculation for Profitability ratios

Profitability ratios measure profitability of the company with respect to their sales and investments. According to finance theory, profitability ratios determine business operation efficiency with the assistance of profits so they are called profitability ratios.

Digital Relay

Profitability ratios

Ratios

Formula

19X7

Profit Margin

Net Income / Net sales

8.67%

Return on Equity

Net Income / Total Equity

32.50%

Return on Assets

Net Income / Total Assets

11.82%

Positive Or Negative Financial Leverage

Leverage means purchasing of an asset with the creditors funds and preferred stockholders in order to benefit common shareholders. Financial leverage is considered to be a two-edged sword which means that it can be negative or positive.

A positive financial leverage indicates that assets that have been obtained with the money offered by the creditors & preferred stockholders produce rate of return which is greater than the interest rate or dividend payable to the fund providers. This positive financial leverage is beneficial for common stockholders due to the higher rate (Broadbent, Cullen, 2012).

As far as negative financial leverage is concern, when assets are obtained with the preferred stock and debt, produce a rate of return which is lower that interest rate or dividend payable to the debt providers or preferred stock. This negative financial leverage indicates a loss for common stockholders.

Company usually have positive financial leverage but few company that acquire assets with more the preferred stock and debt and generate return lower than interest rate, then they will have negative otherwise they will have positive leverage (Broadbent, Cullen, 2012).

Horizontal Analysis

Horizontal analysis

Mary Lynn Corporation

For Year 20X1 and 20X2

 

Increase (Decrease)

 

20X2

20X1

Amount

Percent

Current Assets

$76,000

$80,000

($4,000)

-5.00%

Property, Plant, and Equipment (net)

99,000

90,000

$9,000

10.00%

Intangibles

25,000

50,000

($25,000)

-50.00%

Current Liabilities

40,800

48,000

($7,200)

-15.00%

Long-Term Liabilities

143,000

160,000

($17,000)

-10.63%

Stockholders' Equity

16,200

12,000

$4,200

35.00%

Net Sales

500,000

500,000

$0

0.00%

Cost of Goods Sold

332,500

350,000

($17,500)

-5.00%

Operating Expenses

93,500

85,000

$8,500

10.00%

Horizontal Analysis shows how much change incurred from previous year, both in terms of dollars as well as in percentages. This is helpful while making a comparison from year to year. From the above horizontal analysis of Mary Lynn Corporation, current has been reduced with 5% i.e. 4000 reduction from last year, whereas, 10% increased in Property, Plant, and Equipment in 20X2 with ...